There is a 1 bed efficiency guest house on the same lot that we have just listed as an STR.

If you believe you can carry this place, without a negative carry, make any necessary repairs and can make changes to improve the rents...

In my day job I’m an ops professional who manages a tech stack and efficiency is important.

If you are consistent with these action items you will avoid most claims, your business will be more profitable,  operate more efficiently and if a claim were to arise you will have all your ducks in a row. 

We then use our money for the improvements.

I initially accepted it as an improvement.

Don’t forget heloc, DSCR, 2nd on primary, borrow from retirement accounts, credit card cash advance, property reserves, home improvement store credit, etc etc.

I manage my own properties as do my clients; with the electronic resources for screening, rent collection, more - the ROI is greatly improved and you retain control of the property.Hope this helps.

A lot of investors find that expenses like repairs, vacancies, and capital improvements can eat into their margins, especially early on.

The loan does need to be secured by the property being improved if we are talking about a personal residence and personal itemized deductions on Schedule A.